Consumption set to falter after Japan’s workers eke out 0.1% pay hike in 2015

The nation’s workers barely got a pay rise in 2015, with a 0.1 percent increase in cash earnings slower than the 0.4 percent bump in 2014.

Total wages in Japan haven’t risen more than 1 percent since 1997 and they fell for the past four years once inflation is accounted for, the labor ministry said Monday in Tokyo.

Higher wages are considered crucial to generate growth and consumption and for the Bank of Japan’s efforts to spur inflation. Prime Minister Shinzo Abe has repeatedly called for companies to boost pay, and Bank of Japan Gov. Haruhiko Kuroda has said that the level of increase is “somewhat slow” considering the nation’s low unemployment and companies’ profits.

“The pace of wage gains has been very slow when you think about how much labor shortage there is,” said Hisashi Yamada, chief economist at the Japan Research Institute in Tokyo. The BOJ’s latest move was to support wage gains by boosting stocks and weakening the currency, but Yamada wasn’t sure how much impact that will have.

Weak pay increases are feeding through to poor consumption, with domestic consumption shrinking 0.6 percent in the final three months of last year from the previous quarter, according to the median estimate of 19 economists. That would be the second contraction last year after falling in the April-June period.

The economy contracted an annualized 0.8 percent in the period, according to forecasts ahead of data due next week.

Wages need to rise at a 3 percent annual clip to achieve stable 2 percent inflation, BOJ board member Yutaka Harada said last year. Such wage gains would reflect a 2 percent increase in the cost of living and a 1 percent gain in labor productivity, he said.

Harada voted for the bank’s most recent stimulus, when it introduced negative rates in January.

The Japanese Trade Union Confederation (Rengo) is seeking an increase of “about” 2 percent in monthly base wages for the fiscal year starting in April 1, after falling short in 2015 in a push for gains of “at least” that amount. Finance Minister Taro Aso had said that unions should seek a 3 or 4 percent pay hike.